Updates to the Vectura Group PLC

For a company whose avowed goal is to rid the world of cigarettes, it’s strange that Philip Morris International doesn’t know when to quit.

The tobacco company increased its controversial bid for UK inhaler company Vectura this weekend to 165p per share, or £ 1.02 billion.

This equates to a 60 percent premium over the share price before the public interest is made public. It exceeded the deal struck last week with private equity group Carlyle at 155 pence a share, which itself canceled PMI’s July offer.

Given the furious reaction from anti-smoking and medical groups to the prospect of a tobacco company buying a manufacturer of treatments for smoking-related illnesses, PMI could have used Carlyle’s return to gracefully retreat.

But no. And the UK Takeover Panel, anxious to avoid endless jumps, threw Vectura into a five-day auction process, suggesting the parties could not agree between themselves on how to resolve this feud by timely.

The real problem here is that Vectura’s board has not taken control of deciding what is in the best interests of the company. He has yet to show that he understands that in today’s trading world, the best deal doesn’t always equal the best price.

Of course, PMI has deep pockets and is desperate to find a “Beyond the Nicotine” future for itself. Vectura’s revenue from treating conditions like chronic obstructive pulmonary disease is critical to its goal of achieving $ 1 billion in non-nicotine sales by 2025.

The company is presumably convinced that its ownership will not hurt Vectura’s prospects, even more so than the British Thoracic Society, which said last week it had an “intractable ethical conflict”. Or the European Respiratory Society, which has declared itself “very alarmed” and suggested that clinicians avoid prescribing the society’s drugs. Both groups highlighted rules denying membership to those with links to tobacco, who also cannot be involved in research activities or events.

Vectura’s board belatedly woke up to these concerns in its recommendation of Carlyle’s offer last week. The business may be “better positioned as Carlyle Ownership” to meet its current strategy and the interests of stakeholders such as employees, suppliers or customers.

It seems undeniably true. PMI may have tried to smear its rival with the stakeholder brush, arguing that as a long-term buyer the tobacco company does not focus on “short-term gains and efficiency.”

But you don’t have to be the biggest fan of private equity to think that an offer put forward by former GSK finance boss Simon Dingemans probably has a buy-and-build plan. Either way, healthcare groups aren’t lining up to issue warnings on Carlyle.

How the balance between shareholders and other interests should be weighed in takeover situations depends on the lawyer you use. But the pressure to meet the requirements of the Companies Act to “accommodate” a wider range of parties than just investors has never been greater.

Hiding behind an alleged duty to put a higher number of shareholders misses the point. Vectura’s board did not need to recommend PMI’s July offer to increase competitive tension. It is up to the board of directors, not the shareholders, to act in the best interests of the company at large.

It would have been “entirely appropriate”, according to a senior lawyer, for Vectura’s board of directors to declare that PMI was not a suitable owner for the company. This is effectively what Unilever did with Kraft Heinz zero cost die cutters. Disgruntled investors can sell in a hostile bid, if it materializes, or blow up the board.

Vectura admins, who have now withdrawn their recommendation for Carlyle, also can’t hide behind an auction. The board can make its own decision when this ends. Price doesn’t have to win – and, if there was any doubt, a good chunk of Vectura’s shareholders have said so. Investors with a combined 11.2% stake have signed irrevocable pledges backing Carlyle, which do not expire unless a competing bid is 10% higher, or 170.5 pence.

In other words, who buys the business is worth something as well as the price he is willing to pay. Vectura’s board of directors messed up this process. He still has the opportunity to make the right final decision.

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